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Kevin_in_GA
4,553 posts
msg #120468
Ignore Kevin_in_GA
modified
6/4/2014 11:18:46 PM

I thought I would share several of the Pangolin IC trades for this week. Most folks here are stock traders like me, but lately I have been looking at options strategies that might generate steady income with a low risk profile. I focused in fairly quickly on a strategy known as an "Iron Condor". An Iron Condor is a fixed risk, directionally neutral option strategy that makes money as long as the underlying index or stock does not move more than a specified amount prior to option expiration. As a seller of these contracts, time decay (theta) is on your side, and appropriate positioning of the puts and calls can provide a 90+% likelihood of the trade closing profitably.

Within Pangolin IC I only trade Iron Condors on the ETFs for the major indices (SPY and IWM), and I usually try to include one on GLD if the premium is high enough. With these ETFs large price dislocations are uncommon, unlike higher volatility stocks where earnings can cause a 5-10% move overnight. The condors are established with a delta for each wing of 0.10 or less (delta is the statistical likelihood of a losing outcome, so 0.10 means a 10% chance of losing and a 90% chance of winning).

I also use only weekly options - these options have a much greater time decay and traditional monthly options, which as a seller works to our benefit. And frankly it is easier to sell risk where the market WILL NOT go than it is to take risk trying to predict where it WILL go. Iron Condors are one of the most reliable option strategies for generating steady income growth regardless of market direction. This is not rocket science - it is a simple and straightforward application of statistics to market activity.

So for the next few weeks I thought I'd let folks see the trades and learn about this option strategy. As always, thoughtful discussion is both expected and encouraged.

IWM weekly condor for options expiring 13 June (in 9 days)

STO 20 IWM1413F116 IWM Jun13'14 116 call at market
Filled: 0.14 at 6/4/14 14:14 ET
BTO 20 IWM1413F118 IWM Jun13'14 118 call at market
Filled: 0.03 at 6/4/14 14:13 ET
Current Call Spread Delta = 0.11 (89% probability of staying below 116)

BTO 20 IWM1413R106 IWM Jun13'14 106 put at limit 0.11
Filled: 0.10 at 6/4/14 14:11 ET
STO 20 IWM1413R108 IWM Jun13'14 108 put at market
Filled: 0.21 at 6/4/14 14:12 ET
Current Put Spread Delta = 0.12 (88% probability of staying above 108)


As long as the price of IWM does not close above 116 by the end of the day next Friday, the call spread will return $220 before commissions against a risk of $2000 (11%). Similarly as long as the price of IWM does not close below 108 by the end of the day next Friday, the put spread will return $220 before commissions against a risk of $2000 (11%).

So if IWM stays within the range of 108 - 116 by the close of trading next Friday, this IC will net $440 against a total at risk of only $1780 (since only one side could be a loss, the total at risk is only one side or $2000 minus the $220 profit made from the other side). Potential return before commisisons of 24.8%, with an 88% likelihood of having the condor spreads expire profitably.

SPY weekly condor for options expiring 13 June (in 9 days)

STO 20 SPY1413F197 SPY Jun13'14 197 call at market
Filled: 0.11 at 6/4/14 14:32 ET
BTO 20 SPY1413F199 SPY Jun13'14 199 call at market
Filled: 0.03 at 6/4/14 14:32 ET
Current Call Spread Delta = 0.09 (91% probability of staying below 197)

BTO 20 SPY1413R186 SPY Jun13'14 186 put at market
Filled: 0.11 at 6/4/14 14:40 ET
STO 20 SPY1413R188 SPY Jun13'14 188 put at market
Filled: 0.20 at 6/4/14 14:41 ET
Current Put Spread Delta = 0.10 (90% probability of staying above 188)

As long as the price of SPY does not close above 197 by the end of the day next Friday, the call spread will return $160 before commissions against a risk of $2000 (8%). Similarly as long as the price of IWM does not close below 188 by the end of the day next Friday, the put spread will return $180 before commissions against a risk of $2000 (9%).

So just like in the previous trade, as long as SPY stays within the range of 188 - 197 by the close of trading next Friday, this IC will net $340 against a total at risk of $1860. Potential return before commisisons of 18.3%, with a 90% likelihood of having the condor spreads expire profitably.

GLD weekly condor for options expiring 13 June (in 9 days)

BTO 20 GLD1413R114 GLD Jun13'14 114 put at limit 0.09
Filled: 0.06 at 6/4/14 14:34 ET
STO 20 GLD1413R116 GLD Jun13'14 116 put at market
Filled: 0.13 at 6/4/14 14:34 ET

I wanted to get the other side of this condor (buy the 126 call and sell the 124 call) but could not get it at a spread price of at least 0.05. Below that amount the trade return just isn't worth it. As long as the price of GLD does not close below 116 by the end of the day next Friday, the put spread will return $140 before commissions against a risk of $2000 (7%).

I'll update the stats on these trades as they progress to expiration next week - I'm assuming a starting equity of $25,000 for an imaginary account trading this. That means only $5640 or about 22% of the equity is in trades. Assuming all goes as planned the return will be $920 before commissions, or about 2-3% on starting equity after commissions - in about a week.

At 20 contracts each, the commissions on these trades will cost about $38 for each spread ($19 per trade) so the realized profit after taking these out will be more like $730. I'll record all costs here as these play out over the course of the next 9 days. Some brokers will charge no commission to close an option that is worth less than 0.05, some charge no commission for options to expire, others charge for both. This being a paper trade, I'll be using Interactive Brokers' fee structure to model these costs.

guspenskiy13
976 posts
msg #120498
Ignore guspenskiy13
modified
6/5/2014 8:38:40 PM

Thanks for sharing Kevin, this is great.

I'm currently in the process of learning options - but I have a couple...hmm...let's say preliminary questions...

You state that the risk is $2000 (without the profit from the other side) - however you only use $5640 in this test - I suppose that is

because you have 2000 for SPY/IWM but less for GLD - since you didn't get the other side? At the same time, you say that one

side is 2000...this got me a little confused.. As well as the proportion of total capital to the amount invested to the amount

risked.... If the other 10% of the probability happens - we lose pretty much our entire position?


In terms of risk....let's take SPY... we have $340 potential profit against the risk of $1860 with the probability of 90%.

So in this case, Risk to Reward would be (340 * 0.9) / (1860 * 0.1) = 1.645 .... It seems that one loss will wipe

out almost 6 profitable weeks of this strategy if we take SPY as an example....right?


Thanks for sharing again.... by the way.... I don't know if you are aware, but in Thinkorswim you can do simulated option trades

using past data and see the P/L of how you will do... might be helpful for testing....










Kevin_in_GA
4,553 posts
msg #120499
Ignore Kevin_in_GA
modified
6/5/2014 8:57:25 PM

Sort of - I wrote this which I thought explained it:

So if IWM stays within the range of 108 - 116 by the close of trading next Friday, this IC will net $440 against a total at risk of only $1780 (since only one side could be a loss, the total at risk is only one side or $2000 minus the $220 profit made from the other side).

The sum of the three trades risk is as I quoted (no profit offset on GLD since there is only one side to the condor).

The max loss is always larger than the max gain in this trade, but you need to think longer term - in any 10 trades we will have 9 wins at $340 and one loss at $1860. That means you make $1200 over 10 trades, or $120 per trade. That is your expectancy and it is equal to 6% of the amount at risk. Not too bad.

And more often than not the actual loss is less than the max loss (which is only hit if the price goes beyond the outer option in the spread). If you are trading multiple ICs you can mitigate any large loss with several smaller wins (although you are also increasing your probability of taking a loss since you are trading more ICs).

Kevin_in_GA
4,553 posts
msg #120500
Ignore Kevin_in_GA
6/5/2014 9:08:07 PM

Update from today's trading:

Today's action is exactly what you DON'T want when trading iron condors - a sudden and significant move in either direction that places the trades under pressure. This is really only happening in the IWM call spread, which has moved from a delta of 0.11 to 0.32. The current price is now only about 0.4 SD from our condor, which definitely increases the risk. However, we have a week to see where things go, and I'm not one to cut and run when the heat is turned up a little.

All other spread deltas are even lower than before, and are not showing any risk signals.

guspenskiy13
976 posts
msg #120501
Ignore guspenskiy13
6/5/2014 9:55:35 PM

I must have been tired or something since you actually wrote it in the first post....my bad...

I wonder if it is more effective in terms of probability to open more trades...or not...

So if we want to calculate the profit.... we have $2000 invested and over the course of 10 weeks they generate $1200....

That's 60 % on the initial... without re-investing... or around 300% / year... is that right?

And this could be done in pretty much any market condition....with limited risk....

It seems like options are a better investing vehicle than stocks....from this point..



Kevin_in_GA
4,553 posts
msg #120502
Ignore Kevin_in_GA
6/5/2014 10:09:33 PM

If you are thinking this can be done with a small account, then no - you don't know when the big loss will come. If it comes first it will wipe your $2000 account out.

I would not put into these type of trades any more than 1/4th of my trading account. Note that I am using an initial equity of $25,000 in this thread, which would be at the ratio I feel comfortable.

You are also confusing "money at risk" with equity. You see a typical return of 6% on "money at risk" but to be safe you need to divide that by 4 to get what your total account sees as a return. Given these are weekly option plays, that still is about 1-2% per week after commissions.

guspenskiy13
976 posts
msg #120503
Ignore guspenskiy13
6/5/2014 10:59:09 PM

Very true, I was about to clarify that....

Still, if we only use 1/4th of our account - that's ~75% return annually on total equity, without re-investing.

And that leaves us 3/4th of the total equity - which could be used as well?

We can use just 1/8th of the trading capital - and still get an average of 32.5%...I bet lots of people would love that...

edellner
9 posts
msg #120519
Ignore edellner
6/6/2014 4:41:54 PM

I trade a similar way, trading indexes starting at 10 delta. However, there are many differences in our approaches as well: Here is what works well for me:

I trade RUT, SPX, and NDX ICs on monthly expirations. Instead of selling 20 contracts collecting 5-10 cents premium , I sell 1 contract at $2.00 credit for a full iron condor since these indexes have higher notional values. The difference in commissions expense is dramatic. There is a tradeoff in the liquidity of these larger indexes as compared to the smaller versions. Obviously, SPY is the gold standard for liquidity, but you can get filled at a reasonable price in the larger priced indexes if you are patient and don’t chase.

I also trade at 20 points wide (25 points w/ NDX). Since I manage my risk against the short strike, the width of the spread doesn’t make a lot of difference from a risk standpoint. It does, of course, increase capital at risk, and the premium collected. In the case of a 20 point wide spread, the capital at risk is $2K for 1 contract.

Initiate the trades with enough time for the premium to erode. For monthly contracts, I trade between 50 and 40 days to expiration.

One clear way to improve the number of winners is to buy back the spread at 50% of the original credit. See the following Tasytrade video that talks about the edge this trade management technique adds. Tasytrade is a free options trading education tool, but you do need to register. https://www.tastytrade.com/tt/shows/market-measures/episodes/11348

I collect about 10% premium and buy back the contracts at 50%, so I am trying to keep 5% of the capital at risk for any expiration. That is a very sweet return.

Finally, I won’t try to sell credit spreads when the VIX is below 13.5 (it is currently 11.4) Even the 10 delta strikes are too close to ATM when the implied volatility of the market is so low. Better to trade long calls and puts when the IV is low.


Kevin_in_GA
4,553 posts
msg #120524
Ignore Kevin_in_GA
6/7/2014 7:01:37 PM

Friday after the close update:

The market moved up again, placing the IWM call spread under serious pressure. The current deltas are as follows:

SPY Put Spread Delta = -0.02 (great)
SPY Call Spread Delta = 0.23 (increased risk)

IWM Put Spread Delta = -0.02 (great)
IWM Call Spread Delta = 0.52 (red zone - current price is above the inner call option)

GLD Put Spread Delta = 0.03 (great)

I'll keep this tracking going - odds are now basically 50/50 that the IWM IC will close at a loss. Too close to call but to exit this spread now would be to take a large loss (almost $1200). In statistical analyses, this happens periodically and about 2/3rds of the time it comes back inside the inner option strike price. Still not the 90+% odds that were in play when the trade was placed ...

I actually like that my first post on this is in trouble - I think it is far more informative to show a system's weaknesses than its strengths (still, I want it to close profitably and will wait and see how it plays out).

guspenskiy13
976 posts
msg #120561
Ignore guspenskiy13
6/9/2014 4:21:55 PM

IWM closed @116.90

still could get under 116 for friday; had 4 good days in a row

StockFetcher Forums · Stock Picks and Trading · TRADING IRON CONDORS - FUN WITH OPTIONS<< 1 2 3 4 5 ... 7 >>Post Follow-up

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